The Tax-Free Savings Account – TFSA
Canadian residents who are age 18 or older can contribute up to limit each year to a Tax-Free Savings Account. Contributions are not deductible for income tax purposes, but TFSA savings can be withdrawn tax-free at any time and for any reason. A TFSA can hold a variety of investment instruments, including cash, stocks, bonds and mutual funds, all of which can grow tax-free for life. That means that interest, dividends and capital gains earned in a TFSA are never taxed, even when they are withdrawn.
Since the savings in a TFSA can be withdrawn at any time and for any reason, these plans are frequently used to save for purchases, such as automobiles, homes or even vacations. In addition, any money that is withdrawn can be put back into the plan during the following calendar year.
Both RRSPs and TFSAs offer Canadians a powerful means of saving for retirement.
The RRSPs, which has been around for 60 years, provides an upfront tax incentive, since contributions are tax deductible. Withdrawals made during lower-earning years generally result in reduced tax liability.
TFSAs, on the other hand, offer no upfront tax incentive, but since withdrawals can be made at any time tax-free, they provide a practical means of savings for retirement or short-term purchases.
Canadians are not limited to choosing one plan over the other, and many opt for both plans to meet their savings and retirement goals.